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I find it an interesting aspect of human psychology, at least as it applies to economics and investing, how the Wall Street community likes to judge everything in a relative sense. If your stocks only lost 30% in 2008, this is considered a success because the broad market lost 37% and you beat your benchmark – although any related cheering would be somewhat muted. Those currently of a more bullish persuasion love to tout the notion that somehow the 2% dividend yield on large cap equities is attractive because it is higher than the 1.6% yield on the 10-year Treasury. Ignoring for a second that this comparison completely ignores the vastly different risk profile of these two investments, it also ignores the fact that on an absolute basis, a 2% dividend yield is among the lowest in history and portends very low returns going forward. Less bad is very different than good. I think the same can be said for the U.S. economy.

While Europe is in worse shape relative to the U.S., it doesn't mean that the domestic economy is doing well. It is not, and we are likely to continue to struggle. In a nutshell, too much debt has been accumulated relative to what can be repaid because there is not enough growth and income to service that which already is outstanding – nor do we believe that such high levels of growth are realistically achievable. The natural inclination, absent government intervention, is for the debt to default or deflate - a fancy way of saying that outstanding debt does not get paid back. Since one person’s liability is another's asset, the creditors who lent the money, through defaults or debt deflation, are forced to realize massive losses. These losses would cascade through the economy in the form of further reductions of economic demand and extremely tight credit requirements from lenders focused on repairing their own balance sheets. This path, should it be uniformly pursued, would have the impact of clearing the system of its excesses, thus setting the stage for more sustainable economic growth, but at the possible price of a recession/depression that would be extremely severe in its magnitude. Politically speaking, this path is never going to be taken.

Instead, policymakers continue to replace old debt with new debt, shift it from the private to the public sector, and increase the amount of base money in the system to fill the gaps in both bank and government balance sheets. Instead of paying back the excesses of the credit boom in terms of magnitude (a more severe economic contraction that clears the system), we have opted to repay debt in the duration of our economic malaise, thereby opting to stunt the natural course of deleveraging by borrowing more at the sovereign level and printing money. The choice for dealing with our economic hangover is simple - magnitude or duration - and for better or worse, we have chosen the latter. Like those dealing with serious addiction, one can take a path to detoxification which would rid the body of its ills at the price of a horrible physical experience, or one can keep feeding an addiction, perhaps in moderately reduced doses, in order to avert the pain. Unfortunately, the path of least resistance doesn't solve the addiction and ultimately leads to the potential for another more serious systemic failure. In our debt-addicted economy, the same is true. While the private sector has deleveraged in the U.S., the public sector has filled the void with more borrowing. Japan chose this path 20 years ago, and while we acknowledge major differences in implementation, their economy continues to struggle today - all the while accumulating the highest sovereign debt to GDP burden in the world. They have only masked their issues, and may now have created a much bigger one. Five years into our own malaise, we seem to be forging a similar path.

How much deleveraging has occurred in the U.S. economy to date? Judging from the chart below, courtesy of Bianco Research, not much at all. Actually, we have increased our aggregate credit market debt since the ostensible end of The Great Recession. Total credit market debt has increased to nearly $54 trillion. While the private sector debt burden, currently, has declined from $33 trillion in 2008 to $30 trillion, during this interval, public sector debt levels have risen to a record $24 trillion. Relative to GDP and the ability to service this debt, we have deleveraged from a high of 385% total debt to GDP in late 2008 down to 353% today – not very much considering the depth of the last recession. Even if only modest, this sounds like we've at least made some progress, right? Once again, this is only true in a relative sense. We have lowered our debt relative to GDP from their worst levels ever, to the levels that existed way back in...2007 -- yes, 2007 -- when the financial markets figured out that we had borrowed way more than could be paid back, to be followed by a major credit crisis and the worst recession in 80 years. We have barely moved the needle. Once again, we have chosen to extend the duration of our deleveraging episode in order to avoid a more severe magnitude. I think it would be unwise to expect the economy to "feel better" anytime soon.